STRS May Board meeting schedule revised

From STRS, May 14, 2010

REVISED
PUBLIC MEETING NOTICE

The State Teachers Retirement Board and Committee meetings currently scheduled at the STRS Ohio offices, 275 East Broad Street, Columbus, Ohio 43215, are as follows:

Wednesday, May 19, 2010

...11 a.m. Disability Review Panel (Executive Session)
.....3 p.m. Ad Hoc Committee for Retreat Review

Thursday, May 20, 2010
.....9 a.m. Audit Committee
.....9:30 a.m. Retirement Board Meeting

The Retirement Board meeting will come to order at 9:30 a.m. on Thursday, May 20, 2010, and begin with a report from the Investment Dept., followed by a report on Long-Term Fiduciary & Financial Contingency Planning, Executive Director's Report, public participation, a report from the Member Benefits Dept. - Health Care, routine matters, old business, new business or any other matters requiring attention.

STRS FLASHBACK - 6 Ethics Convictions and 7 Years Ago Dennis Leone Fired the Shot Heard 'Round Ohio

From John Curry, May 13, 2010
....and thanks to his board service, most of the mismanagement, misspending and entitlement mentality at STRS took a hike! I said "most," not all! For those new to CORE , Dennis's composition (below) is the Holy Grail of Reform at STRS. John

Dennis Leone's investigative report on STRS May 16, 2003

May 16, 2003
MEMO TO: All STRS Board Members Herb Dyer, STRS Executive Director
FROM: Dennis Leone, Superintendent Chillicothe City Schools
SUBJECT: STRS Organizational Matters and Spending Practices

Over the past three months, I have studied information supplied to me by STRS staff in an attempt to better understand issues that have received considerable news media attention recently. It also has been my desire to learn the truth about numerous STRS financial issues that have been on the minds of many STRS active members, retired members, and employers.

I have reached the following conclusions:

1. Membership Issues: According to the STRS Comprehensive Annual Financial Report for fiscal year 2002, STRS has 424,171 total individual members. This includes 178,557 active members, 105,300 retired members, 15,730 re-employed retirees, 106,746 inactive members (eligible for refunds only), and 17,838 terminated members (eligible to receive a benefit at some point in the future). There also are 944 employers that send their portion of retirement contributions to STRS. The bulk of these (899) are school boards that represent public school districts, county ESCs, vocational schools, MRDD boards, and community schools - all of which have contributed 14% of every employee's annual salary to STRS since January of 1984.

CONCLUSION: The make-up of the current 9-member STRS Board really is not representative of its membership. Only one member of the Board represents retirees and no one represents the 944 employers that make the very existence of STRS possible. It would seem that the Ohio School Boards Association should either have a seat on the STRS Board or some official role in the STRS decision-making process. The 944 employers send more dollars to STRS than all active members combined, and therefore they need to have direct involvement and a voice in how the millions they send in are spent. Retirees, likewise, are under-represented and feel taken for granted.

2. Declining Assets: To set the record straight, STRS assets peaked on August 31, 2000 at $58.7 billion. Assets dropped significantly over the next 2 years - hitting a low of $41.6 billion on September 30, 2002 - before rebounding slightly six months later to $42.4 billion on March 30, 2003. The net $16.3 billion drop in assets between 8-31-00 and 3-30-03 represents a 28% loss in assets for STRS over the 2 ½-year period. Enron stock started declining continuously in the summer of 2001, prior to the September 11 tragedy. Unfortunately, nationally recognized external investment consultants utilized by STRS - some of which had been quite helpful is assisting STRS benefit from the stock market in the past - provided bad advice in this instance. Before STRS finally ceased buying Enron shares in late November of 2001, $66 million was lost. The Columbus Dispatch reported on April 18, 2003, that STRS "underperformed" most pension funds nationally in 2002 in the area of investments. The report, based on a national study conducted by Milliman USA, stated that the median loss in investment revenue for public employee retirement systems nationally in 2002 was 8%. The loss at STRS, however, was 11.6%.

CONCLUSION: Mr. Stephan Mitchell has served STRS for the past 30 years, the last 20 of which have been as Deputy Executive Director in charge of investments. It has been published that STRS employs twice as many investment specialists as PERS (even though PERS has greater assets). Mr. Mitchell also has acknowledged that STRS has the largest investment staff of any teacher retirement system in the nation. While the investment returns at STRS have not been good over the past 3 years, and while some argue that STRS should have had a "stop loss" provision in place to prevent the huge losses experienced in the Enron fiasco, STRS investments were quite successful prior to 2000. Mr. Mitchell has had a good track record at STRS and retired members have benefited greatly from the productive investments by his department. Due to the collapse of Enron and other corporations, STRS needs to reassess its policies and practices for investing the membership's money to help ensure that investments are better protected. Even if stock market advice received is normally reliable, it seems there needs to be greater consideration for the use of "stop loss" orders to trigger an investment pull-out at a certain point after the stock has declined (to protect prior gains and/or minimize continued losses).

3. Staffing and Administrative Expenses: According to the STRS Comprehensive Annual Financial Reports, administrative expenses climbed at STRS 17.4% per year during the 6-year period between 1996 and 2002. (Administrative expenses include such things as salaries and benefits of STRS employees, legal services, travel, supplies, printing, computer services, etc.) The Columbus Dispatch reported on November 3, 2002 that in the specific area of salaries, STRS costs went up 26% in one year alone between 2000 and 2001. During the same one year time period, the Dispatch reported that total administrative expenses at STRS went up 25%. During the 6-year period between 1996 and 2002 - according to data supplied by STRS staff - the number of people employed at STRS rose from 414 to 725, an increase of 12.5% per year. In a letter dated February 28, 2003 from STRS Executive Director Herb Dyer to the Ohio Retirement Study Council, Mr. Dyer wrote that 137 new employees were added in 2001 alone, and 69 of those were in administration.

CONCLUSION: While it is true that a number of new employees were needed to staff the new STRS headquarters in the areas of security, information technology, and various membership services, it is hard to accept these types of increases at a time when the total assets at STRS have plummeted a staggering 28% ($16.3 billion). When the school boards that send dollars to STRS experience declining assets on the home front, they do things like freezing salaries, cutting supplies, laying off employees, and even closing schools. In a nutshell, they reduce expenses by instituting cost-cutting measures. The STRS Board and administration have not satisfactorily demonstrated that they have reduced costs in their "house." While the administration is to be commended for reducing the total number of STRS employees in recent months to 707 (after peaking at 735 in February of 2003), much more needs to be done. To begin with, there needs to be a shift in what the STRS Board considers as priorities. The Board currently is not in touch with the managerial principles and fiscal realities from which their members and employers must operate under in order to survive. The STRS Board and administration are living a professional lifestyle that is completely foreign to their own membership. They need to emulate their membership. They need to set an example, and show they understand how it important it is to do so. This situation must change.

4. Costs Associated With New STRS Headquarters: An STRS summary of construction costs for the new and renovated building that opened in September of 2001 shows that a total of $94.2 million was spent. Included in this very nice facility is a fitness center for STRS employees that the staff estimates cost $426,000, and a child care center for STRS employees that the staff estimates cost $818,000. Also included in the cost for the new building was $869,235 for sculptures, artwork, and polished stones. One sculpture cost $378,500, another cost $168,125, another cost $112,500 and yet another cost $100,000.

CONCLUSION: The membership of STRS is NOT sending in a portion of their annual salaries to enable the Board and the administration to spend an incredible $869,235 on sculptures, artwork and polished stones. The new STRS building is not a museum, is it? It is outrageous that these purchases were allowed to occur. There is simply no acceptable answer for it. The need for the new STRS building to have a costly fitness center and a child care center is a subject for debate. What is not a subject of debate is that there are substantial annual STRS operating costs associated with the child care center. When Board members have been asked about the child care center at regional meetings, some have implied that the operating costs for the child care center are covered by the fees that are charged to the users in the STRS building. While it is true that fees are charged, they only covered 46.6% of the total child care center operating costs in 2002 - according to data supplied by STRS staff. The other 53.4% of the operating costs associated with operating the child care center in 2002 - according to data supplied by STRS staff - is picked up by STRS. And how much did this cost in 2002? The STRS Board offered up $487,560 to operate the child care center. STRS members and their employers do NOT pay their required retirement contributions so the STRS Board can annually pick up 53.4% of the operating costs of a child care center for STRS staff members. If Latch Key programs operated by school districts do not pay for themselves through fees, then they're discontinued. The $869,235 that was spent by the STRS Board on sculptures, artwork, and polished stones, and the $487,560 that was spent by the STRS Board in 2002 to operate a child care center were simply wrong. Both represent a managerial and fiscal embarrassment. The STRS Board seems to forget that their members are in a period of financial decline.

5. The 13th Check: For 21 consecutive years starting in 1981 and ending in 2001, STRS awarded a 13th check to retired members. This check was not based on prior retirement contributions of retired members or their former employers. It was based on positive STRS investment earnings each year - earnings that occurred from the utilization of the prior contributions of retired members and the current contributions of active members. According to data supplied by both STRS and the Ohio Retirement Study Council in Columbus, the total amount awarded during this 21-year period was $711 million. If one adds the lost investment income to that amount, the total price tag for the 13th check was $1.4 billion. On December 11, 1996, a Joint House/Senate Legislative Committee of the Ohio General Assembly released its 8-month study of Ohio's public retirement plans. Included in this committee's final report was a proposal from the Ohio Retirement Study Council. It recommended that the 13th check to retired STRS members be disbanded. Despite this recommendation, the STRS Board continued to hand out the 13th check for 5 more years at a total cost of $233 million. (And this total does not include another $52 million that was lost in interest earnings during the same 5-year time period.)

CONCLUSION: While retired members deserved the 13th check as a way to help deal with inflation, some now feel that all of those dollars really should have been put into the STRS health insurance fund or in a rainy day fund. According to NEA, no other state has done anything close to what Ohio has done with its 13th check. Only four other states provide bonus checks to retirees, and all of those do so intermittently and/or only with specific legislative approval on an annual basis. It deserves noting that immediately after STRS received the recommendation in December of 1996 to disband the 13th check, literally thousands of teachers and retirees wrote to legislators and STRS Board members to voice their opposition to the proposed disbandment. In fact, OEA urged its members to write letters at that time. While the 13th check seemed like the right thing to do at the time, whether it should ever have started is now being questioned. Had STRS honored the recommendation it received in 1996 regarding this fund, the projected deficit for the STRS health insurance fund for 2004 would not be there. In fairness to STRS, what the Board did in 1996 is what some school boards and collegiate trustee boards do - they respond to the vocal and written pressure of their constituents.

6. Cash Reimbursements for Unused Sick Leave and Vacation Leave: Existing Board policies permit STRS employees to receive reimbursement on an annual basis for up to 9 days of unused sick leave and 9 days of unused vacation time. Employees must have a balance of at least 20 sick leave days and 5 vacation days to qualify. In 2002, according to data supplied by STRS staff, the STRS Board paid out $701,948 in sick leave reimbursements and $342,980 in vacation leave reimbursements. Collectively, this employee benefit cost the STRS budget $1,044,928.

CONCLUSIONS: How many school districts provide all full-time employees an annual cash reimbursement for unused sick leave and unused vacation leave? It would be one thing to provide such a benefit to a select few, but to provide it to all full-time employees is inconsistent with the practices of the overwhelming majority of STRS members that are employers. It is common for school districts to provide a sick leave severance check to employees when they retire. It also is common for school districts to award a small cash amount of a few hundred dollars to employees who have perfect attendance. What STRS does is not common. These two policies need to be dropped, except for perhaps a few individuals. It deserves noting that until 2002, the STRS Board paid 100% of the family health insurance premiums of employees. Last year was the first time in STRS history that employees had to pay a portion of the Board's total premium cost. The number of STRS employer members that pay 100% of their employees' family health insurance premiums is, indeed, very rare.

7. Annual Bonus Checks to STRS Employees: There are 3 major types of bonus checks that STRS administrators and investment personnel are eligible to receive on an annual basis on top of their base salary and base salary raise. Investment employees are eligible to receive two major bonus checks annually, while non-investment administrators are eligible to receive one major bonus check per year. According to data published in the STRS 2002 Staffing, Compen-sation, and Benefits Review, the following summarizes the total number of full-time STRS employees who received these bonus checks over just the 2000-2001-2002 three-year period:
(Click image to enlarge)

In 2002, according to data supplied by STRS staff, there were 82 STRS employees with total salaries (base salary plus bonus checks) in excess of $100,000. Thirty Three (33) STRS employees received total salaries in 2002 that were larger than the current 2003 salaries of the governor and the chief justice of the State Supreme Court. In other words, 33 STRS employees earned in excess of $155,000 in 2002. Fifteen (15) of these cleared $200,000. The following represents the distribution of bonus checks that STRS employees received in 2002:
In 2001, there was one investment employee who received single bonus checks of $110,000 and $68,880 on top of her base salary of $164,000. This brought her total STRS salary in 2001 to $342,880. And according to Mr. Dyer's February 28, 2003 letter to the Ohio Retirement Study Council, all investment personnel also received a 3.2% base raise in 2001. CONCLUSION: It is almost incomprehensible that during a three-year time period when STRS total assets declined a huge 28% ($16.3 billion), the STRS Board spent $12.2 million on bonus checks for employees. The dollar amounts associated with the bonus checks are mind-blowing. For the 944 employers that send STRS employee contributions each month, the bonuses represent fantasyland finances. Who could have guessed that one STRS employee received single bones checks in 2001 of $110,000 and $68,880 on top of her $164,000 base salary? Who would have thought that 34 STRS employees would receive bonus check totals in excess of $40,000 in 2002?

STRS Board members and administrators defend the bonus checks awarded for several reasons. First, they say, the money used for the bonuses for the investment personnel comes from a pool of dollars that was received when investment earnings were positive in years past. They say that since investment revenue has declined, money will not be available for these bonuses for very long in the future. We shall see. Secondly, and most importantly, they state firmly that the bonuses for investment personnel have been based on the employee's ability to achieve both an individual investment benchmark and a total fund investment benchmark. Under this standard, an investment employee still could receive a bonus check even if STRS assets decline, as long as the performance of the stock he/she is managing doesn't decline as much. A third reason STRS Board members and administrators defend the bonuses is they risk losing valuable employees to the private sector (where they can receive the bonuses and higher salaries). While this concern could very well be valid, it is not fair or reasonable to expect the STRS membership to accept it given the realities of the financial problems facing everyone else.

In 2002, 65 STRS administrators received bonus checks. Since they had nothing to do with the investment earnings, why did they receive the bonuses at all, given the overall decline in STRS assets? All of them received a base salary increase. While maybe there is some logic in providing a few top STRS employees some type of small bonus for exemplary work, it defies logic for bonuses to be awarded to 395 employees in 2002…..and big bonuses at that. There are a lot of excellent school treasurers in Ohio who invested money very well for their school districts in the 1990's. Did any of them get big bonuses for bringing interest earnings into their school district? If any did, it was a rare circumstance and it likely was a very small bonus. Properly investing the school district's money is part of the treasurer's job. That is why they receive a base salary. The large number of bonuses STRS gives its administrators must stop immediately. Bonus checks for so many investment personnel must stop as well. It they must be given, they should go to a select few, and they should more realistically reflect the realities facing the 944 employers and the thousands of individuals who are members of STRS. On November 13, 2002, according to the STRS 2002 Staffing, Compensation and Benefits Review, a company called Buck Consultants recommended that STRS do a better job of "establishing a clear link between individual performance and overall organizational success." The consultants analyzed recent STRS practices for bonuses, and wrote:

"The absence of a direct linkage among organization-wide performance and absolute performance (versus indexed) and incentive payouts is inconsistent with best practices."

To an outsider, the above would seem to mean that if STRS is failing to show profits with its investments, employees shouldn't be receiving bonus checks. Ultimately and unfortunately, it will be the STRS Board who determines what constitutes organizational success, not the membership. Is there any wonder how a membership survey would turn out if the STRS Board took the time to ask their membership what they feel about these issues?

8. Travel-Related Expenses for STRS Board Members: According to data supplied by STRS staff, $177,009 is expected to be spent in 2003 on travel-related expenses for Board member/administrator development, training, professional seminars, and conferences, and for investment transactions, plus real estate transactions. In the three previous years, the total amounts spent were $186,116 (2000), $174,167 (2001), and $170,001 (2002). On May 31, 1995, the Cleveland Plain Dealer called into question the fact that Board members were turning in bills for trips to places like Hawaii and Palm Springs, for lodging at the nation's top hotels, for dining at expensive restaurants, and for beach bar bills. The article said that one Board member named Jack Chapman, who is a current Board member, spent $36,736 the previous year all by himself. According to the article, a planned trip by STRS Board members to China two years earlier was cancelled after the State Attorney General Office complained that such a trip would create an image of "junketeering." In recent years, while no STRS Board member has spend money like the Plain Dealer claims Jack Chapman did in 1994, Board members still spend a great deal of membership money on out-of-state travel expenses. The total travel-related expenses and the number of trips requiring airfare over the past 3 years are shown for each Board member below:

CONCLUSION: While there certainly are valid reasons for Board members and administrators to attend professional seminars and be properly trained, and while the STRS membership wants to be effectively represented at real estate/investment transactions, was it really necessary for Board members to spend so much money for so many out-of-state trips over the past 3 years? The STRS Board and administration say yes. The STRS membership says no. One would think that after the Plain Dealer wrote the article in 1995 about STRS Board member expenses for out-of-state trips, and after a 28% decline in assets ($16.3 billion) since August of 2000, maybe - just maybe - expensive trips to places like Hawaii would cease. Not so. Board members Eugene Norris, Deborah Scott, and Hazel Sidaway spent thousands of dollars to go to Honolulu in 2000. Board members Jack Chapman and Gloria Gaylord spent thousands of dollars to go to Kiawah Island off the coast of South Carolina in 2001. Chapman liked it so much that he went back in 2002. Board members Michael Billirakis and Joe Endry spent thousands of dollars to go to Anchorage, Alaska in 2002. Perhaps, in the minds of Board members, the dollar amounts spent and the out-of-state trips taken are not excessive or exorbitant. The STRS Board just simply doesn't understand that if the boards representing the 944 employers that are members of STRS took trips like these at a time when their organization was experiencing financial difficulties and/or declining assets, they'd be run out of town. The public wouldn't stand for it. The "public" that represents STRS is the membership - 178,557 active members, 105,300 retired members, 15,730 rehired retirees, and 944 employers.

Recommendations: The $100,000 sculpture sitting outside the STRS Board room on the 6th floor is entitled "Integrity." The inscription under the sculpture reads:

"Integrity…..guiding all that we do at STRS Ohio, from retirement Board actions to counseling members and investing money. This sculpture symbolizes integrity through the bronze figure representing members, intertwined with the stainless steel figure providing the security so highly valued by members and benefit recipients alike. The spiraling shape captures the boundless energy and strength that characterizes the system's mission and vision."

1. If the STRS Board truly believes it has the "integrity" to "provide security so highly valued by members," then NOW is the time for the Board members and the administration to have a new priority, a new focus, and a new philosophy regarding their past spending practices. No one is blaming STRS for the downturn in the nation's economy or for the national health care crisis. But when your assets have declined by a huge 28% ($16.3 billion) over just 2 ½ years - and you tell your membership at the same time that there's no longer enough money to pay for health insurance or an inflationary increase (the 13th check) - you need to fully understand that:

" The Board cannot spend $869,235 for sculptures, artwork, and polished stones in a new/renovated $94.2 million building.

" The Board cannot increase administrative expenses 25%, increase administrative salaries 26%, and hire 69 new administrators in the same year.

" The Board cannot give STRS employees annual cash reimbursements totaling $1,044,928 for portions of unused sick leave and unused vacation leave.

" The Board cannot spend $487,560 per year to provide child care services for STRS employees in a center that the Board spent $818,000 to construct.

" The Board cannot give 395 employees gigantic bonus checks every year (34 of them over $40,000 in 2002 alone) totaling $12.2 million over 3 years.

" The Board cannot give out bonus checks, period, except to very select few, and only if STRS assets exceed the asset high that was achieved in August of 2000. What the Board has done in the immediate past is tell the retired membership that it didn't have funds for a 13th check, but then came up with the funds for its own internal 13th check - the one that's a huge bonus increase for 395 employees.

" The Board cannot take trips so many trips in a single year, go to places like Honolulu, Anchorage, and Kiawah Island, or allow single Board members to have 10-15 airfares and travel-related expenses totaling anything close to $36,767 in one year.

2. It is recommended that dollars currently set aside for future employees bonuses be put into the STRS health insurance fund.

3. It is recommended that you seek legislation to change the make-up of the STRS Board in such a way that there is increased representation from retired members and new representation from the 944 employers.

4. It is recommended that you lay off employees, cut costs internally, and initiate steps to reduce total administrative expenses to their pre-August of 2000 level - which is when the total assets at STRS started to decline.

5. It is recommended that you receive serious in-service training (at a Columbus location) from managerial experts who can help you better relate to the financial conditions currently facing your individual members and employer members, how your membership is dealing with said conditions, and how STRS can help them.

6. It is recommended that you survey your entire membership - as corporations do with their stockholders - specifically to see how they feel about the seven bullet points on pages 11 and 12 of this memorandum. You might be surprised at the answer.

This time 'round it wasn't STRS who felt they were "entitled," it was SERS! A "raise" for "meeting goals?" Spare Me!

From John Curry, May 13, 2010

School Employees' Pension System Scolded for Proposing 2 Percent Raises

With unemployment still high and a major public pension overhaul in the works, the School Employees Retirement System came in for much scorn Wednesday on its proposal to bump up workers' pay in its next budget. "I think this is a great example of how the public sector lives in a Cinderella world," said Rep. Lynn Wachtmann (RNapoleon), a member of the Ohio Retirement Study Council, which heard the budget proposal Wednesday.

The school employees' pension draft budget proposes a $29.3 million operating budget, a 4.2 percent increase above FY10. Included in that budget is a 2 percent merit raise for pension fund employees. The pension fund's board of directors is set to take up the draft budget next week.

Virginia Brizendine, the chief financial officer for SERS, described the raises as a "minimal amount" to reward employees for meeting goals, and said it was lower than the raises most of the pension systems' members saw in the past year. But Sen. Kirk Schuring (R-Canton) said school employees' raises are probably attributable to local union contracts that are on a different cycle than the state budget. "I, for one, am very disappointed in that 2 percent increase. I recommend you take that back to the board and see if you can make an adjustment," he said.

Carol Morris, interim director or SERS, said granting small raises to experienced employees to keep them around costs less than hiring and training new staff, prompting Schuring to say, "I didn't realize there was enough of a job market out there that people would leave in the blink of an eye."

Sen. Keith Faber (R-Celina) said the proposal was out of step with the state's financial situation and would not play well when state lawmakers go on a "listening tour" this summer to shop around potential pension funding and benefit changes needed as a result of the economic collapse. "If you guys haven't got the message in the plans yet ... you should be in a state of austerity that should make our heads spin," Faber said. "If you don't get that message now, I don't know how else to send it." "We hear you, and we will take that into advisement," Brizendine said.

The State Teachers Retirement System also presented its draft budget Wednesday, proposing a $90.1 million operating budget, a 2 percent increase above the previous year. Though personnel costs are up in the draft, it does not include any merit or cost-of-living pay increases.

Rep. Todd Book (D-McDermott), the committee chairman, asked the pension funds to explain the effects of Thursday's market shock. "Do we have things in place to keep us from getting caught up in that kind of situation?" Book asked.

(Note from John...gee, remember Dr. Leone repeatedly trying to pass a safety mechanism to protect us against a sudden and serious drop in the price of a stock or stocks? Of course, that request fell on deaf ears at STRS, didn't it?)

Chris DeRose, executive director of the Public Employees Retirement System, said while different outside asset managers reacted differently, the pension's long-term allocation strategy preempted quick panic.

"Our mandates and our guidelines and policies protect us ... we did take a hit like everyone else, but we recovered that," said William Estabrook, executive director of the Police and Fire Pension Fund.

RH Jones: How is the COLA cut going to save $9 billion?

From RH Jones, May 13, 2010
Subject: Re: STRS handout (3 pages) from Laura Ecklar today

To John, Laura Ecklar and all:

Concerning page 2 of STRS official Laura Ecklar's handout, I would like some explanation from her as to where the STRS employees come up with the astounding $9 billion figure that they claim the simple COLA cut would bring the financial health of pension fund down from infinity to 34.4 years. By the STRS combining retirees who have retired at much less income level than that of current and future retirees seems to me to be unfair to us older retirees.

Also, concerning HC/Rx funding of 1% of the employers contribution mentioned, please remember that the fund was 4%, until cut down.

RHJones, a OH STRS retired teacher member

Dennis Leone on pensions funds holding onto risky assets too long (Steve Mitchell -- what do you think?)

From Dennis Leone, May 13, 2010
Subject: RE: Ohio pension systems didn't move fast enough?

Hmmmmm, remember how – month after month – I begged the board to approve a mechanism that would trigger STRS getting out of certain stocks if abnormal circumstances caused them to suddenly go south? Couldn't get support for it. Mitchell said it wasn't necessary. He also didn't like my recommended provision that would require him to notify the board in the event that something extraordinary was happening. Nope.

DL

From John Curry, May 13, 2010

Yes, Dennis, I certainly do remember. For those affected by this great loss of funds, hindsight is 20/20 for those who suffered losses, isn't it? Even now, what do you bet that STRS won't adopt that "mechanism."

John

From Molly Janczyk, May 13, 2010

Dennis, There you go again - against the grain and not agreeing to agree so as not to make waves. What is the matter with you? A good board member should not question and should ALWAYS show unity. Once again the unions have what they want in unified agreement. I read the minutes and never see any dissent on votes. I admit I at times, don't bother with every month so maybe I missed one. Actually, as one STRS member stated to me, it is good that Stoll didn't win as it places one in such a position of negativity and frustration to actually raise issues and question STRS and he would never get a second anyway.

Ohio pension systems didn't move fast enough?

From John Curry, May 13, 2010

State pension funds held risky assets for too long

Deputy treasurer, though, got rid of $800 million in bad investments

Columbus Dispatch, May 12, 2010
By Alan Johnson

http://www.dispatch.com/live/content/local_news/stories/2010/05/12/state-pension-funds-held-risky-assets-too-long.html?sid=101

Shortly after arriving at the Ohio treasurer's office in early 2008, Amer Ahmad discovered a ticking time bomb: $800 million in risky short-term investments, including some with Lehman Brothers.

Fresh off 12 years working for two large Wall Street firms, the deputy state treasurer and chief financial officer immediately saw red flags.

In less than a week, the treasurer's office, then headed by Richard Cordray, disposed of all assets that Ahmad considered toxic.

"I made a choice that we should not be investing in these companies," Ahmad said, "because in the world I just came from, everybody knew these companies were toxic assets."

But it was a different story at Ohio's five pension funds. For a number of reasons, the funds could not or did not move quickly enough to sell off questionable assets. As a result, the treasurer's office, which acts as custodian but does not invest pension monies, calculated that the funds had a combined $480 million loss in market value solely from Lehman investments. Officials at the pension funds, in response to questions from The Dispatch, calculated direct losses at about $220 million. The difference between the two figures essentially represents the higher value the investments reached before plummeting when the markets fell in September 2008.

Ahmad said the types of investments at the treasurer's office and the pension funds were different. The treasurer had short-term commercial paper, including some from Lehman Brothers, while the pension funds generally had longer-term mortgage- or asset-backed securities, or investments in failed or failing financial institutions.

But he said the bottom line is the same: "Toxic means toxic."

A spokesman for the Ohio Police & Fire Pension Fund said its external fund managers made their investment decisions based on objective criteria.

"What OP&F owned was managed by a quantitative model-driven account that triggered buys and sells based on a formula that looked at many market factors," David Graham said in a statement.

Dan Weiss, executive director of the Highway Patrol Retirement System, the smallest of the five state pensions, said the attorney general's office concluded that the system's loss was too small to justify a lawsuit. The system lost less than $75,000, Weiss said.

The State Teachers Retirement System did not own any subprime mortgage-backed securities with Lehman Brothers or any other company, a spokeswoman said.

Officials from the Ohio Public Employees Retirement System and School Employees Retirement System of Ohio did not have answers today, noting the difficulty of defining "toxic assets."

Even after the sell-off by the treasurer's office, Lehman Brothers officials continued pitching new investments to the agency.

In late July and early August 2008, Ahmad said he received calls from two senior management officials: Erin Callan, chief financial officer, and Paolo Tonucci, corporate treasurer.

"They said, 'Things are fine at Lehman Brothers. We would encourage you to buy our commercial paper and help us with the liquidity issues we have on Wall Street.'"

But Corday and Ahmad decided to "distance ourselves" from the commercial-paper holdings, Ahmad said.

Ahmad said he found it "shocking" that such high-level officials would call to pitch investments to the state.

About six weeks later, Lehman Brothers announced it was filing for bankruptcy. It was the largest corporate bankruptcy in U.S. history. An examiner's report said the firm masked $50 billion in debt.

The Lehman Brothers issue continued spilling over into the gubernatorial race between incumbent Democrat Ted Strickland and Republican challenger John Kasich.

In a statement to The Dispatch this week, the Kasich campaign acknowledged that he helped arrange two meetings in 2002 between Lehman officials and representatives of the public employees and police and fire funds. The meetings did not result in any business for Lehman, where Kasich was a director.

"We also think there's more information that is not yet known, and that's one of the reasons that we are asking the congressman to be more transparent," Strickland said today. "I think now he's trying to rewrite his own history, and I'm not of a mind to let him do that."

In a separate interview, Kasich said he was doing a professional favor for a colleague by arranging the meetings.

"It was no more; we didn't get any business out of it. I was not in on it," he said. "That's the end of it. Period."

Dispatch Senior Editor Joe Hallett and reporters James Nash and Mark Niquette contributed to this story.

ajohnson@dispatch.com

The STRS Ohio Plan to Strengthen the Financial Condition of the Retirement System

This three page handout was made available to the Franklin County RTA members 5/12/10 by Laura Ecklar, who briefly addressed the group (following the main speaker on Alzheimer's Disease) on the financial situation of STRS as it pertains to pensions. Laura stayed to speak with any individuals who had questions.

Maximize your screen and click twice on each image to enlarge.


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31 teachers to get the pink slip at Sylvania schools

From John Curry, May 12, 2010

Note from John....I wonder if the Sylvania school board will back the additional 2.5% request for health care funding for STRS educator stakeholders? Do ya' think you know the answer without having to ask?

www.toledoblade.com/apps/pbcs.dll/article?AID=/20100511/NEWS04/5110414/0/FRONTPAGE
Layoffs of 50 from Sylvania schools likely

Board set to vote Monday on offsetting $4.2M deficit

Toledo Blade, May 11, 2010
By JIM SIELICKI
BLADE STAFF WRITER

The Sylvania City School District expects to drop 50 staff positions, including 31 teachers, to eliminate a projected $4.2 million deficit by June 30, 2011.

Superintendent Brad Rieger told the Board of Education at a meeting at Southview High School last night that most reductions would be through retirements, resignations, and leaving vacancies unfilled. In the end, about 15 teachers would be laid off before school begins in the fall, said Consuelo Hernandez, executive director of human resources.

The board plans a special meeting next Monday to vote on the superintendent's proposals, although comments from board members indicate Mr. Rieger's proposal to cut seven math intervention teachers may be modified.

Board President Jim Nusbaum said the board will consider putting a tax issue on the fall ballot. That decision would be made this summer, he said.

A $3.2 million deficit projected earlier this year grew as a result of continued losses of property taxes and state funding, and a growing number of foreclosures, Treasurer Laura Sauber said.

Mr. Rieger said 85 percent of the district's $85 million operating budget is spent on salaries and benefits, leaving little from operations for significant reductions. "We are in the people business and we connect with kids," Mr. Rieger said. "These [the eliminated positions] are numbers, but there are faces behind them. And that's what is so challenging."

The superintendent outlined $3.9 million in budget reductions, with the lion's share, $1.3 million, coming from operational expenses such as building and department budgets for the district's 12 sites.

The district plans to save $450,000 by not purchasing new computers or updating current ones and an additional $150,000 by not purchasing textbooks.

Mr. Rieger said the $3.9 million doesn't match the $4.2 million projected deficit, but further action would wait for "the dust to settle" from this set of proposals before advancing further. Additional resignations and cost reductions elsewhere could make up the difference, he said.

Other proposed cuts and their savings include support services, where eight positions would be eliminated to save $328,000. Adding all-day kindergarten in the fall would eliminate midday bus routes, thus saving the equivalent of 4.5 positions, Mr. Rieger said.

The elementary staff would lose 14.5 positions.

Those include math and reading intervention teachers, special education teachers, guidance counselors, and a general education teacher.

The junior high schools would lose two English teachers, two special-education positions, two special education paraprofessionals, and a part-time French teaching position.

In the high schools, 10 teaching positions would be dropped in social studies, math, science, English, special education, career/medical technology, agriculture, German, and physical education. Chinese language instruction, which is contracted through the University of Toledo, also would be pared.

Last night's discussion over proposed reductions marks the third time in eight years the district has had to make or propose severe budget cuts.

David Spiess, who joined the board in 2002, called the latest cycle "heart-wrenching."

"At this point in time we should be investing in education, but instead we are divesting in education," Mr. Spiess said.

In 2004, the school district eliminated 72 positions before placing a 4.9-mill levy on the fall ballot. The issue, which was approved, generates $7 million a year.

Mr. Rieger said money from the continuing operating levy remains steady, while inflation and other costs continue to rise.

Two students said later the priorities for cuts appeared to be misplaced.

"Clearly the need for cuts is necessary," said Allison Yocum, 17, a junior at Northview, adding that cuts should not be made in science, technology, and math intervention. She suggested the board take its budget ax to soft classes that students use to fill time or beef up their grade point averages.

"There are classes people take to get easy 'A's. Those are not what colleges are looking for."

Yanni Papadimos, 17, also a Northview junior, concurred, saying the board has neglected the opinions of its students about classes that should be retained and areas that can be cut.

"They have not asked the students yet," he said.

Contact Jim Sielicki at: jsielicki@theblade.com or 419-724-6050.

Click image to enlarge.
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Wanna' see the difference between a simple COLA and a compound COLA?

From John Curry, May 9, 2010

http://news.cincinnati.com/article/20100403/NEWS01/4040346

COLAs loom large in pension snarl

Calculations become issue as city expenses grow

By Barry M. Horstman • bhorstman@enquirer.com
cincinnati.com, April 3, 2010

It sounds like the kind of arcane accounting question only an actuary could love: How should annual cost-of-living adjustments in Cincinnati's pension system be calculated?

Yet while the cost-of-living adjustment (COLA) is a seemingly small piece of the city's pension puzzle, it comes with huge financial consequences. The answer to the COLA question determines how big and how fast a city retiree's pension grows, an issue with multimillion-dollar stakes for taxpayers - and City Hall.

Under one common method, a retiree who receives an annual 3 percent increase would have to wait 33 years-plus to see his pension double, assuming he lives that long.

But under an alternative now used by the Cincinnati Retirement System, his pension could double in only about 24 years - a crucial distinction that could result in the system paying much higher benefits for more years.

Among the thorny issues before a 12-member city task force examining ways to ensure the retirement fund's long-term solvency is whether to recommend that a so-called simple or compound COLA be used to help retirees' pensions keep pace with inflation.

With a simple COLA, the annual adjustment is based on retirees' original pension for the rest of their life. So, if an individual is entitled to a $50,000-a-year pension and a 3 percent annual increase, he would receive a $1,500 hike yearly, pushing up his pension to $51,500 in his second year of retirement, $53,000 in the third year, and so on.

The compound method, however, includes past pension gains in calculating future ones. Under that method, the retiree's $51,500 pension in year two would be used to compute the next 3 percent raise, producing a $1,545 jump to $53,045 in year three.

While that is only $45 more than under the simple method, the gap widens substantially the longer the pension is paid. For example, after 25 years, a simple 3 percent annual COLA would increase the original $50,000 pension to $87,500, while the compound method would already top $100,000.

At its core, the COLA question measures harsh fiscal realities against compassionate impulses.

Judged from a strictly financial perspective, the simple COLA method would be preferable for a city needing to come up with hundreds of millions of dollars to stabilize its pension system.

It would be considerably less attractive, though, to pensioners. A simple COLA, retirees and current city employees argue, could erode their quality of life, especially during periods of extended high inflation.

"You have to protect the system but also think about how any changes affect current and future retirees," said task force member Marianne Steger, director of health care and public policy for the American Federation of State, County and Municipal Employees - Ohio Council 8. "That's what makes this such a tough call."

Steger's union, the city's biggest public employees union, has not yet taken an official position on the issue.

Until the late 1990s, Cincinnati's retirement system used the simple COLA method, said City Treasurer Jack Walsh. Then, with the system flush following years of impressive investment returns - in December 2000, the pension plan had a $292 million surplus - the city switched to the compound method as a "benefit enhancement" for retirees.

Since then, however, the pension plan's finances have plunged dramatically, the result of under-funding by the city, expanded benefits, soaring health coverage costs and the 2008 stock market meltdown. By December 2008, those factors had erased the surplus and left the system facing an $872 million unfunded liability for projected future payments to roughly 7,600 retirees, current workers and their beneficiaries.

Amid warnings from experts that without major changes, the city's $2 billion retirement system could be bankrupt within 20 years, the task force is pondering whether the pension plan can still afford to pay the more costly compound COLAs, particularly as life expectancies lengthen.

A related question is whether to guarantee retirees an annual 3 percent raise, as now occurs, or to tie the yearly increase to the consumer price index, with 3 percent being the ceiling. At times of mild inflation, the latter approach could produce a lower annual pension bump. In projecting future expenses, task force consultants assume the annual rate would be about 2.5 percent.

"We have to look at everything that helps preserve the basic pension for future generations," Steger said.

DROP and the Double Dip!

From John Curry, May 9, 2010
http://news.cincinnati.com/article/20100214/NEWS01/302060044

Pension packages top $1 million for Cincinnati police, fire chiefs

By Barry M. Horstman • bhorstman@enquirer.com
cincinnati.com, February 14, 2010

Having risen through the ranks, Cincinnati Police Chief Thomas Streicher Jr. and Fire Chief Robert Wright will scale one final impressive height when, thanks to a very generous pension plan, each wraps up his career with a $1 million retirement and benefits package. Having risen through the ranks, Cincinnati Police Chief Thomas Streicher Jr. and Fire Chief Robert Wright will scale one final impressive height when, thanks to a very generous pension plan, each wraps up his career with a $1 million retirement and benefits package.

In Streicher's case, that lump sum will come on top of an estimated $92,000-a-year pension and the more than $235,000 he could receive from the city as a result of 3,700 hours of unused holiday, vacation and sick days.

Wright, who could cash out about $106,000 in unused leave and comp time when he retires, will receive a pension expected to start out at about $89,000. Wright's pension, like Streicher's, will rise with annual cost-of-living increases.

Although the two chiefs put themselves in that enviable financial position simply by taking advantage of city and state policies governing pensions, overtime and comp time, the huge pay days awaiting them poses a thorny question: Should a public official retire as a millionaire – pre-tax, at least – solely on the basis of his pension and related benefits?

"It's outrageous, morally offensive, and I say that as a public official myself," said Steve Erie, a political science professor at the University of California, San Diego, and a widely respected expert on public pensions and compensation.

"You don't expect to see a police chief leave with that kind of check in his pocket," Erie added. "The Cincinnati Police Department ought to have a recruiting poster saying, 'You, too, can be a millionaire.' This definitely is the end of the rainbow. And you wonder why people are so disgusted with government."

The large payments in Streicher's and Wright's future stem from Ohio's Deferred Retirement Option Plan (DROP), which permits public safety officers to build sizable nest eggs in exchange for reduced lifetime pensions.

To be eligible for DROP, individuals must be at least 48 with 25 years of service as a police officer or firefighter. When an officer joins DROP, he or she officially "retires," for pension purposes, but retains the same job. While that caps their future pension, as long as they remain in DROP – for at least three years and up to eight – the monthly pension they otherwise would draw accumulates in a separate account, along with interest and a portion of their 10 percent of salary contributions.

That formula, critics argue, is simply a creative form of double dipping – drawing a pension from one public job while earning a salary from the same or a similar post.

"DROP is nothing but the most blatant double dipping," said Jon Coupal, president of the Howard Jarvis Taxpayers Association, an advocacy group named after the author of California's Proposition 13, the landmark 1978 tax-cutting initiative that swept the country. "As popular as police and fire are, they run the risk of voter backlash because of these obscenely generous pensions and practices like this."

Among other workers, public and private, DROP inspires envy – but also a candid acknowledgement that almost anyone eligible would be crazy not to participate.

"Who wouldn't grab that if they could?" Erie says.

For many public safety officers, basic math makes the decision to enter DROP easy.

According to the Ohio Highway Patrol Retirement System, a 48-year-old trooper earning $50,000 a year who participates in DROP for three years could receive a lump sum of about $107,000 and a pension of $30,625. While that is $250 per month less than the pension he would have drawn otherwise, he would have to live 36 more years for the higher monthly checks to exceed the lump sum.

Many take away much bigger checks. After eight years, a $50,000-a-year police officer's lump sum would soar to nearly $360,000, and for top brass such as Streicher and Wright, payments can approach $1 million.

The Ohio Police & Fire Pension Fund treats DROP membership as secret, so even cities and counties do not know whether specific employees are enrolled.

Many DROP members take advantage of that cloak of privacy. Streicher, for example, repeatedly declined to confirm being in the program, but court documents in his divorce case show he entered it in early 2003.

A calculator on the Ohio Police & Fire Pension Fund's Web site estimates Streicher's payout at $929,261, based on his $114,000 salary in 2003. Wright, who earned $113,570 in 2003, would receive $905,760.

Some legislators who supported creating the program said they are shocked by the size of the impending payouts.

"I'm absolutely stunned," said former state Rep. Michelle Schneider, a Madeira Republican who served on the Ohio Retirement Study Council, a panel that advises state officials on pension matters.

No wonder the Cincy Retirement System is in a world of hurt...check this one out!

From John Curry, May 9, 2010

http://news.cincinnati.com/article/20100426/NEWS01/4250361

Formula bloated city pensions

Nurse's base pay was $55,000, retired, she gets $191,400

By Barry M. Horstman • bhorstman@enquirer.com
cincinnati.com, April 26, 2010

Twenty-one people draw $100,000-plus annual pensions from the troubled Cincinnati Retirement System, many by including tens of thousands of dollars in overtime and unused vacation and sick time to boost their retirement benefits.
The list of the city's top-paid retirees, which also includes another 18 people receiving pensions that top $90,000, is led by Karen Jetter, a former University Hospital nurse now drawing a $191,400 annual pension - more than three times her salary when she retired. That was made possible by a since-discarded formula under which more than $130,000 a year in overtime, cash-outs of unused leave and other extras factored into Jetter's retirement benefits, city records show.

Jetter, 65, of Erlanger, makes no apologies for her $15,950-a-month pension, arguing that she often "worked the equivalent of several jobs" over her 30-year career. She also acknowledges that she willingly worked the extra overtime hours and stockpiled sick and vacation time to "build it up to a nice amount" by the time she retired in 2005.

Other city retirees and employees followed the same script, using large amounts of overtime, accumulated vacation and sick time to significantly increase their pensions.

Combined with annual 3 percent cost-of-living increases, the provisions allow many to draw pensions well beyond what they formerly earned, in the process pushing up pensions that began below $100,000 into the enviable six-figure category - a threshold very few public retirees cross.

Former Greater Cincinnati Water Works Director Richard Miller, for example, who earned about $95,000, draws a $133,289 pension based in part on nearly $38,000 in unused time off cashed in when he retired in 1993.

A similar $33,690 lump-sum payment, spread over three years for pension purposes, has helped lift the retirement check of Thomas Young, former city engineer and traffic engineer, to $124,920 - 55 percent higher than his final $80,400 pay. And former deputy city manager Richard Castellini, who was paid about $98,500 in his final year, included a $43,353 lump-sum payment in the calculation that this year will produce a $115,571 pension. (The city salary figures, officials said, could include bonuses in addition to base pay.)

'A blank check'

Pension experts view the old formula - which, although eliminated for new employees more than a decade ago, still governs the future benefits of many longtime workers on the city's payroll - as an invitation to fatten retirement checks by adhering to the letter, if not the spirit, of pension guidelines.

"When you throw overtime, vacation and sick time into a pension, you might as well write a blank check," said Steve Erie, a political science professor and director of urban studies at the University of California at San Diego.

"True, employees are playing by the city's rules, but people are very good at gaming the system," added Erie, a widely respected expert on public compensation. "Pension formulas like that are insanity. If you're going to blame anyone, start by blaming the city for making it possible."

Hefty $100,000-plus pensions are the exception in the city retirement plan, where only about one-quarter of the roughly 4,500 pensions being paid to retirees and beneficiaries exceed $40,000 a year.

Ironically, some of the biggest pensions now being paid by the city's retirement system stemmed from City Hall's effort in the late 1990s to control spiraling pension costs.

Concerned that existing pension policies based on salaries, overtime and other extras were not only costly but also wildly unpredictable and hampered long-term planning, top city leaders devised a strategy to remedy the problem.

Active employees on the city's payroll before July 1998 could choose between a pension formula that guaranteed them a 2.5 percent "service multiplier" for each year worked, based only on their salary, or a 2.22 percent alternative under which overtime and payments for unused leave also were counted. All new workers hired later would have to use the no-overtime formula.

The city's basic pension formula multiplies the number of years worked by 2.5 or 2.22 percent. So, at the 2.5 percent level, if someone worked 20 years, he would get 50 percent of his final salary - 20 times 2.5 percent.

Then-City Manager John Shirey hoped workers would find the bigger number appealing.

"I was trying to deal with the problem of people loading up on overtime and so forth, all geared toward their pension, in a way that would bring some consistency to the system in terms of the costs way down the road," Shirey said last week. "The thinking was, if you give people a chance to lock in a higher number, they might jump at that."

For a $50,000-a-year employee who retired after 30 years, the 2.5 percent figure would guarantee a pension equal to 75 percent of his pay, or $37,500. The lower 2.22 percent multiplier, in contrast, would guarantee only $33,300.

Many city workers, though, realized this was one time when a bird in the hand was not worth more than two in the bush. Because by working overtime and accumulating large balances of unused leave, the lower formula, they saw, ultimately could produce much higher pensions.

'Shenanigans'

Within a few years, that had become painfully obvious.

In 2002, then-Councilman Pat DeWine uncovered two city supervisors whose overtime tab had been negligible before 1998, but then, in the year before they were eligible to retire, worked up to $25,382 in overtime - extra pay that could be used to hike their pensions.

"There's no question some shenanigans were going on in inflating those final-year salaries," Shirey said.

Even so, Shirey did not try to force a no-overtime pension policy on all employees in the city's retirement system - a group that excludes police officers, firefighters and others in state plans.

"Politically, I wasn't going to win that battle," he said. "So the next best thing was to at least make it mandatory for new employees and try to entice as many existing ones as possible to go to the higher plan. Overtime shouldn't drive pension costs."

At City Hall, it still does, however, and will until employees who have been with the city for at least 12 years, dating back to the 1998 formula choice, retire in coming decades. Of the 21 city pensions above $100,000, 14 are based on calculations that can include overtime and other extras.

Retirees, though, argue they should not be faulted for abiding by provisions established by the city. The fact that the pension system now is viewed as financially unsustainable - without major changes, the $2 billion retirement fund will go broke in about 20 years, consultants warn - is, they insist, a problem of the city's making, not theirs.

"I blame the city for not being consistent and not paying into the system what it should have over the years," said Max Brown, who draws a $108,160 pension based on a 38-year career in UC's Department of Mechanical and Industrial Engineering. Brown, who retired in 1998, added that he turned down several offers over the years that would have doubled his salary, motivated largely by a generous retirement health plan.

"My basic problem is that I worked toward retirement all my life and now I am being called greedy for wanting what was guaranteed by the city," Brown said.

'Devotion to the job'

Nurse Jetter, who still works occasionally at University Hospital, said that professional commitment blended with pension considerations in her decision to work overtime and hold on to vacation and sick time.

"It was 100 percent of my decision to stay," Jetter said of the city pension plan, to which some University Hospital and University of Cincinnati employees belong.

"A lot of overtime was available and I worked a lot of hours. It was a personal sacrifice, but the plus was you'd get the extra cash now and I knew it would make for a better pension later. If you don't give people credit for that in their pension, you take away a big part of the incentive for them to work all those hours."

In Jetter's case, the overtime and leave provisions were a huge incentive that allowed her pension to balloon over the past five years to $191,400.

City records show that as much as $133,876 in overtime and lump-sum payments per year factored into her pension, which is based on employees' three highest-paid years. The records also indicate that Jetter's salary in those years was $85,000-plus, but Jetter, saying that figure apparently includes bonuses and other salary enhancements, said her base pay never exceeded the mid-$50,000 range.

Her response to those who question such a wide disparity between her salary and pension, Jetter said, is simple: "It's not all about the money."

"You're providing service," she said. "You see a benefit later, but it begins with devotion to the job."

UCSD's Erie and others find such explanations unpersuasive.

"I think it's more about devotion to self," Erie said.

"That's why so many public pensions are on the endangered species list. It's that kind of moral amnesia and lack of concern for the long-term common good that got us in so much trouble."